Tax compliance
There may be tax liabilities encountered when transacting with or trading in bitcoins. Some of those that are possible might be described below.
This page was created by those in the Bitcoin community to help in understanding tax compliance concerns. This is not legal nor accounting advice. For either for those consult your attorney or accountant.
Tax Questions
The general tax questions and answers were shared by forum member bitcoinaccountant[1].
Are bitcoins taxable if I earned them by doing a service for someone else, or received them in exchange for something?
Anything that you receive as payment for goods or services is generally taxable income unless it is specifically exempted.
That means, if you mow your neighbor’s lawn, it doesn’t matter if he pays you $20 in cash, or $20 worth of bitcoins. (Or $20 worth of tomatoes for that matter)
You are still legally required to report it to the IRS as income. Now, if you don’t, the IRS will probably never know, but try to mow 10,000 neighbor’s lawns and not report the income and you will be much more likely to get caught.
Are my bitcoins taxed as income, or as capital gains?
Income that is earned through the exchange of services with another person, whether in the form of bitcoins, dollars, or barter; is included in gross income, and would be subject to income tax at applicable rates. Also these bitcoins would be subject to self employment tax.
Income earned through the process of buying and selling bitcoins would also be included in gross income, but would be treated as capital gains.
Note: The above interpretation is based on the assumption bitcoins are treated as stored value such as gold, or other such commodity. If instead they are treated as a currency or debt, the full gain could be taxed based on market value at the end of each tax year. 3858 IRS Ends Currency ETN Adantage Simply put, the IRS never considers currency a long-term investment. Consequently, if bitcoins are treated as a currency, you will be taxed the same as holding an account in any non-functional (foreign) currency.
How are Bitcoins that I have mined treated for tax purposes?
This is a tricky question, in that bitcoins are really the first digital currency that was created in this manner and actually have a significant value in USD. Essentially it is somewhat uncharted territory. Literally bitcoins, and even digital currencies are so new, that there is little to no precedent for some aspects of bitcoin mining, from a tax perspective.
Since Bitcoins are currently traded in various online marketplaces, when someone receives a Bitcoin, they can reasonably calculate it’s value in USD. Because of this, it is possible that the IRS will treat the receipt of a Bitcoin through a mining pool, or from an individual mining operation, as a taxable event. At that time, the taxpayer would be required to estimate the value of the Bitcoins in dollars and record that amount. This would have to be done either daily or weekly depending on the value of the Bitcoins if their value keeps fluctuating as much as it has the past few weeks. These amounts would be recorded as revenue from bitcoin mining operations and would be taxable less allowed expenses.
When selling mined Bitcoins, however, you would also be taxed on the increase between the value you recorded them at when you first received them, and the value you sold them for.
Another possibility is that the government will consider mined Bitcoins ‘intangible personal property’. As a rule, however, financial instruments are excluded from this particular category. The question is, are bitcoins a financial instrument, or rather, will the IRS consider them a financial instrument? We will have to wait and see if bitcoins become popular enough for them to take a position on that.
What expenses can I deduct/expense/itemize if I set up a Bitcoin mining operation?
That depends on your situation. Generally speaking, though, you can deduct business expenses that are ordinary and necessary. Buying video cards would be both of these, buying a big screen TV to watch while mining would be neither.
Do I need to register as a business/LLC/corporation to mine Bitcoins and deduct expenses?
No, regardless of whether you decide to form a corporation, register as an LLC, or simply operate as a private individual, the basic concept of tax treatment for Bitcoins is going to remain the same. For example, you will report gross income, deduct expenses, and have a net taxable income on which you will be required to pay income tax, as well as possibly self employment tax depending on how your mining business is set up.
Types of Transactions
- Currency exchange trading
- Investment as a commodity
- Purchase of goods and services
- Barter
- Compensation / Payroll
Types of Taxes
- Sales Taxes
- Value Added Taxes
- Income Taxes
- Excise Taxes
- Payroll Taxes
Recordkeeping
Trading
The records kept might include the same information that appears on a stock or forex brokerage statement: "Date of trade, Description of trade, Qty & Price, and Fees".
Mining
Depending on how the revenue is to be treated, you may need to know when the Bitcoin proceeds were attained.
Commerce
Regardless of how revenue is recognized for goods and services whose payment is made using Bitcoins, the recordkeeping requirements are likely to be the same: Reference to sales (e.g., cust # / invoice #), amount received (in BTCs) and date. If sales taxes are payable, then for that purpose documentation might include a calculated based on a weighted average exchange rate that existed at the time of sale.